The rise and fall of bitcoin: Inside the virtual currency you can actually spend

This article was taken from the January 2012 issue of Wired
magazine. Be the first to read Wired's articles in print before
they're posted online, and get your hands on loads of additional
content bysubscribing
online.

On November 1, 2008, a man named Satoshi Nakamoto posted a
research paper to an obscure cryptography listserv describing his
design for a new digital currency that he called bitcoin. None of the list's veterans had heard of him, and what
little information could be gleaned was murky and contradictory. In
an online profile, he said he lived in Japan. His email address was from a free
German service. Google searches for
his name turned up no relevant information; it was clearly a
pseudonym. But while Nakamoto himself may have been a puzzle, his
creation cracked a problem that had stumped cryptographers for
decades. The idea of digital money -- convenient and untraceable,
liberated from the oversight of governments and banks -- had been a
hot topic since the birth of the internet. Cypher-punks, the 90s
movement of libertarian cryptographers, dedicated themselves to the
project. Yet every effort to create virtual cash had foundered. Ecash, an anonymous
system launched in the early 90s by cryptographer David Chaum,
failed in part because it depended on the existing infrastructures
of government and credit-card companies. Other proposals followed
-- bit gold, RPOW, b-money -- but none had
got off the ground.

One of the core challenges of designing a digital currency
involves something called the double-spending problem. If a digital
dollar is just information, free from the corporeal strictures of
paper and metal, what's to prevent people from copying and pasting
it as easily as a chunk of text, "spending" it as many times as
they want? The conventional answer involved using a central
clearing house to keep a real-time ledger of all transactions. The
ledger prevents fraud, but it also requires a trusted third party
to administer it.

Bitcoin did away with the third party by publicly distributing
the ledger, what Nakamoto called the "block chain". Users willing
to devote CPU power to running special software would be called
miners and would form a network to maintain the block chain
collectively. In the process, they would also generate new
currency. Transactions would be broadcast to the network, and
computers with the software would compete to solve irreversible
cryptographic puzzles that contain data from several transactions.
The first to solve each puzzle would be awarded 50 new bitcoins,
and the associated block of transactions would be added to the
chain. The difficulty of each puzzle would increase with the number
of miners, keeping production to one block of transactions about
every ten minutes. Also, the size of each block bounty would halve
every 210,000 blocks -- first from 50 bitcoins to 25, then from 25
to 12.5 and so on. Around the year 2140, the currency would reach
its pre-ordained limit of 21 million bitcoins.

When Nakamoto's paper came out in 2008, trust in the ability of
governments and banks to manage the economy and the money supply
was at its nadir. The US government was throwing dollars at Wall
Street and the Detroit car companies. Many central banks in the
west were introducing "quantitative easing", essentially printing
money in order to stimulate the economy. The price of gold was
rising. Bitcoin required no faith in the politicians or financiers
who had wrecked the economy -- just in Nakamoto's elegant
algorithms. Not only did bitcoin's public ledger seem to protect
against fraud, but the predetermined release of the digital
currency kept the bitcoin money supply growing at a predictable
rate, immune to printing-press-happy central bankers and
Weimar-style hyperinflation.

Nakamoto himself mined the first 50 bitcoins -- which came to be
called the genesis block -- on January 3, 2009. For a year or so,
his creation remained the province of a tiny group of early
adopters. But slowly, word of bitcoin spread beyond the insular
world of cryptography. It has won accolades from some of digital
currency's greatest minds. Wei Dai, inventor of b-money, calls it
"very significant"; Nick Szabo, who created bit gold, hails bitcoin
as "a great contribution to the world"; and Hal Finney, the eminent
cryptographer behind RPOW, says it's "potentially world-changing".
The Electronic Frontier Foundation, an advocate for digital
privacy, eventually started accepting donations in the alternative
currency.

The small band of early bitcoiners all shared the communitarian
spirit of an open-source-software project. Gavin Andresen, a coder
in New England, bought 10,000 bitcoins for $50 (£32) and created a
site called the Bitcoin Faucet, where he gave them away for the
hell of it. Laszlo Hanyecz, a Florida programmer, conducted what
bitcoiners think of as the first real-world bitcoin transaction,
paying 10,000 bitcoins to get two pizzas delivered from Papa
John's. (He sent the bitcoins to a volunteer in England, who then
made a credit-card order transatlantically.) A farmer in
Massachusetts named David Forster began accepting bitcoins as
payment for alpaca socks.

The faithful tried to solve the mystery of the man they called
simply Satoshi. On a bitcoin IRC channel, someone noted
portentously that in Japanese Satoshi means "wise". Someone else
wondered whether the name might be a sly portmanteau of four tech
companies: SAmsung, TOSHIba, NAKAmichi and MOTOrola. It seemed
doubtful that Nakamoto was even Japanese. His English had the
flawless, idiomatic ring of a native speaker. Perhaps, it was
suggested, Nakamoto wasn't one man but a mysterious group with an
inscrutable purpose.

"I exchanged some emails with whoever Satoshi supposedly is,"
says Hanyecz, who was on bitcoin's core developer team for a time.
"I'd get replies maybe every two weeks, as if someone would check
it once in a while. But bitcoin seems awfully well designed for one
person to crank out." Nakamoto revealed little about himself,
limiting his online utterances to technical discussion of his
source code. On December 5, 2010, after bitcoiners started to
callfor WikiLeaks to accept bitcoin donations, the normally terse
Nakamoto weighed in with uncharacteristic vehemence. "No, don't
'bring it on,'" he wrote in the bitcoin forum. "The project needs
to grow gradually so the software can be strengthened along the
way. I make this appeal to WikiLeaks not to try to use bitcoin.
Bitcoin is a small beta community in its infancy. You would not
stand to get more than pocket change, and the heat you would bring
would likely destroy us at this stage."

hen, as unexpectedly as he had appeared, Nakamoto vanished. At
6.22 pm GMT on December 12, seven days after his WikiLeaks plea, he
posted his final message to the bitcoin forum. His email responses
became erratic, then stopped. Andresen, who had taken over the role
of lead developer, was now one of just a few people with whom he
still communicated. On April 26, Andresen told fellow coders:
"Satoshi did suggest this morning that I (we) should try to
de-emphasise the whole 'mysterious founder' thing when talking
publicly about bitcoin." Then Nakamoto stopped replying even to
Andresen's emails. Bitcoiners wondered plaintively why he had left
them. But by then his creation had taken on a life of its own.

Comments

I would like to thank you for the efforts you have put in writing this blog. I'm hoping the same high-grade web site post from you in the future also. Actually your creative writing abilities has encouraged me to get my own web site going now. Really blogging is spreading its wings and growing fast. Your write up is a great example.

Nurul@bitcoin

Mar 8th 2012

Thanks for taking the time to discuss this, I feel strongly about it and really like learning more on this matter. If possible, as you gain expertise, would you mind updating your blog with more details? It is extremely helpful for me.kamagra